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Looking for Tech Stocks? These 2 Are Great Buys

Motley Fool - Sat Oct 29, 2022

The U.S. economy rose at a 0.6% rate in the third quarter following two consecutive quarters of decline. Despite the increase, that hasn't put recession concerns on the back burner.

While the overall economy may have expanded, consumer spending is slowing, down to 1.4% from 2% last quarter, as the impact of the fastest growth in inflation in 40 years hits pocketbooks. Although durable goods orders were up 0.4% in September, that was slightly below consensus estimates. Controlling for transportation, which can be volatile due to large single orders of new planes, ships, etc., this metric actually fell 0.5% for the period compared to a 0.2% increase in August.

Pen charting a rising stock.

Image source: Getty Images.

The stock market itself is giving conflicting signals, with the S&P 500 still in bear market territory or down 20% year to date, as growth stocks have been sold off as investors seek out safer havens, often among dividend payers. While many former high-flyers are doing much worse than the popular market index, their businesses are still solid, and they offer attractive valuations.

That's an opportunity savvy investors often look for because when the inflection point returns, they'll own good companies at excellent prices, even if they didn't quite get them at rock-bottom prices. The following pair of growth stocks are now amazing deals for investors willing to hold until they are ripe for a bounce-back recovery.

1. Zoom Video Communications

Down is the only direction Zoom Video Communications(NASDAQ: ZM) has been zooming this year. Shares are off 71% from recent highs and 86% below their pandemic-era peak when lockdowns ruled, and video conferencing was required.

The sell-off since seems overwrought. What's not apparent by simply looking at the stock is how good Zoom's business actually is. It ended 2020 with just $623 million in revenue, but that has grown to over $4 billion today, a 156% compound annual growth rate. Revenue is up 10% so far in 2022.

There's no doubt Zoom and its industry peers are entering a slower-growth period at the moment because of a return to normalcy on the one hand and the choppy economy on the other. Yet Zoom is expanding its universe of businesses by also targeting enterprise-class companies where it is gaining traction.

It has 204,100 enterprise customers, an 18% increase from last year with a trailing-12-month net dollar expansion rate, or how much more money the same group of customers from last year is spending on the platform this year, of 120%.

So it might not be where Zoom Video is right now but where it's heading. Having cemented its position as a leader in business productivity and communications, it can leverage that to expand the verticals it serves, creating an attractive ecosystem where businesses of all sizes can grow.

Person with laptop in front of glowing blue screens.

Image source: Getty Images.

2. Confluent

Another former growth stock seemingly in a race to the bottom is Confluent(NASDAQ: CFLT), the managed framework for streaming data between internal systems, whose stock is also down 71% from its 52-week high.

The centerpiece of Confluent's solutions is Apache Kafka, an open-source platform that has become the industry standard for data streaming that's popular with 80% of Fortune 500 companies. Confluent allows such businesses to use the platform as a core technology regardless of whether their systems are in the cloud, on private data centers, have a combination of cloud and on-premise capabilities, or even have multi-cloud environments.

Confluent is also rapidly growing, with revenue rising from $130 million three years ago to almost $350 million last year and up another 64% this year. While it is always possible a customer could drop Confluent and bring the data in motion in-house -- as noted, Apache Kafka is open-source -- it doesn't seem likely these corporations want to undertake the responsibility.

Confluent sees its business continuing to grow at a robust rate, with revenue rising 63% this year, while Wall Street expects it to triple by 2026, hitting over $1.6 billion. That could be due to the rise of its next area of targeted growth, Confluent Cloud, its software as a service offering, that's already ramping up. Revenue has ratcheted more than six-fold higher since 2019 while tripling to $94 million from 2020.

Perpetual losses worry investors, but analysts forecast earnings before interest, taxes, depreciation, and amortization (EBITDA) to turn positive within the next five years. So for patient investors, Confluent could be the stock to strike it rich with.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Confluent, Inc. and Zoom Video Communications. The Motley Fool has a disclosure policy.

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